Six Strategic Mistakes Made By The Recording Industry

The IFPI Digital Music Report (PDF) contains lots of fascinating facts and figures on the challenges faced by the industry. The IFPI say the 31% drop in global revenue is the result of piracy which requires government legislation. However, this is only half the story. Will the IFPI also admit that strategic mistakes of their members is a significant reason the industry is in such difficulties?

Here are six mistakes made by the recording industry

1. Not licensing the next ‘Napster’.
Ok, I understand why Napster had to be sued. A legal precedent had to be set that stated beyond doubt that companies such as Napster had to acquire a license and share their revenue. But, having established in 2000 that unlicensed sharing of files was a breach of copyright, how many peer-to-peer sites have been licensed in the last 11 years? I worked in music licensing for nearly ten years and I’m struggling to think of even ONE! Wippit went out of business. Playlouder didn’t ever launch. Limewire tried and were rebuked. So in the intervening years the record industry has failed to figure out how to license a highly effective and popular distribution channel.

2. Agreed 79p with iTunes, then being locked in to the price
I was there – there were no calculations, no strategy and no cost analysis. Apple said they wanted to sell tracks for $0.99, and the labels agreed. Since then, this price has become the industry standard. Is it the right price? Should it be higher or lower? We don’t really know because, after Apple became the dominant retailer, the labels had to agree a form of reverse-MFN with iTunes, meaning if they offered a lower price to anyone else, they would have to offer the same lower price to iTunes. And since iTunes represent 70% of their sales, you can guess why they don’t do it. The fact is, 79p is an unrealistic price for people who want to fill their iPods or phones with thousands of tracks. It simply doesn’t make sense. Yet the industry continues to stick rigidly with a price that was plucked out of thin air and now can’t be changed.

3. Not offering blanket licenses
Have you ever tried getting a license for your online store? Unless you are backed by a VC, or have a spare £1m, it’s virtually impossible. (Want more evidence – take a look at the number of major entertainment websites who still don’t play music due to lack of a license). Small retailers, bloggers, niche stores, P2P, digital lockers, cloud start-ups, students – if any of them wanted a license they’d find it requires multiple visits to each major plus several indie distributors. Why is this the case? Three letters – M, T and V. The Majors think the industry trade bodies, previously entrusted to negotiate collective agreements, screwed up by giving MTV a license too cheaply so vowed in future they would do it themselves. With disastrous results for any small entrepreneur who has a great new idea for how to sell music online.

4. Initial insistance on DRM
Remember DRM? Consumers hated it. But for several years the Majors, and some Indies, stuck rigidly to the deluded belief that people would buy tracks with DRM on them. This meant the legal ‘DRM’ services offered by HMV, Apple, Real, etc were at a huge disadvantage to the illegal sites offering MP3, which meant as a result millions of early adopters learnt how to look for music elsewhere. And if they did buy a track with DRM they quickly vowed never to buy one again when it couldn’t be transferred to their new device, play on their DJ software, shared on their blog etc

5. Protecting the traditional retailers for too long
For the first few years the ‘online strategy’ of the Majors was to protect the traditional retailers and the CD. (At Sony, I heard a few years later, that a very senior executive told his department that retailers must be protected ‘until this Internet thing blows over’). This meant not offering downloads if they were not on a CD, not selling download-only releases, not undercutting CD prices and not including downloads in the charts. This meant for the first important years the online download industry simply mirrored what had gone before. Nothing new, nothing innovative and nothing attractive to the music fans who quickly wanted to explore the world opening up to them. And now? The retailers are going out of business and the protection was completely wasted.

6. Putting The Legal Affairs Department In Charge Of Online
In the early days of the Internet a decision was made by most Labels, due to the complex nature of the negotiations, to place online responsibility in the hands of the IT guys and the Legal Depts. Since there were no such thing as digital sales, neither the Sales or Marketing Depts had much interest in Digital or representation on the internal ‘digital strategy’ committees. And so, the deals done were mostly completed from a “Legal” perspective. This meant precedents had to be set and adhered to, deals had to heavily favour the record company even if they were not commercially viable for the licensee, copyright was protected at all times and consumers were sued. I’m not having a dig at lawyers. However, their role within a Label is predominantly one of exploitation (of copyright) and protection. If Sales and Marketing had been involved from Day One, could we have seen a more consumer-friendly approach?

Could these mistakes have been avoided? Well, consider this saying by Henry Kissinger; “If something is going to happen in the end, you may as well do it in the beginning“. P2P is never going to disappear and must be licensed. DRM was ludicrous from day one and should never have been implemented. 79p per track is too high and unsustainable and should be lowered. It’s abundantly obvious that blanket licensing is the only pragmatic way to license the majority of music distribution. Anyone with future vision could see that CD’s would be replaced.

The lobbyists and BPI repeatedly ask Government for protection, e.g. the Digital Economy Act, as if piracy was the sole reason for their troubles. And yet, repeatedly, the music industry has made wrong strategic decisions at senior management levels when faced with new technology.